The SOS proposal is in large part a response to several state
budget trends. Four of these trends are reviewed below, and an analysis of the
proposal follows after.

The State Budget: 1995-2007

This discussion of the state budget begins with fiscal 1995.
Starting with an earlier year would likely produce similar observations, but
comparisons of the pre- and post-1995 state budgets involve serious practical
difficulties because of the significant constitutional changes created by the
passage of Proposal A of 1994 (a landmark state constitutional amendment
involving public school finance). In adopting fiscal 1995 as a starting point,
this study is following the example of the Michigan Senate Fiscal Agency, which
likewise chose fiscal 1995 as the starting point for its analysis of the SOS
proposal.

State spending in Michigan since fiscal 1995 can be separated
into two distinct phases, with fiscal 2001 serving as a watershed. The first
phase occurred during a time of rising state tax revenues and economic strength;
the second phase occurred during a time of falling tax revenue and economic
decline.

From fiscal 1995 through fiscal 2001, state spending grew
along with rapidly rising state tax revenues and a strong Michigan economy.
According to the Michigan Senate Fiscal Agency, total state spending from state
resources (as opposed to, for instance, federal government resources) was about
$19.3 billion in fiscal 1995 and more than $25.2 billion in fiscal 2001, a total
growth of more than 30 percent. During the same period, the sum of the inflation
rate and the state’s population growth rate was less than 20 percent. Thus, if
the SOS proposal had been in effect in fiscal 1995, the fiscal 2001 state budget
would have been more than $2.2 billion smaller, or about 9 percent less, than it
actually was (see Graphic 2).[6]

State government spending changed with the national recession
in 2001. Michigan jobs and capital declined, and state government tax revenue
fell as well. This problem has persisted since fiscal 2001. State spending from
state resources declined significantly against inflation over the next six
years, growing less than 10 percent from fiscal 2001 to the recently approved
budget for fiscal 2007, while total inflation and population growth for the
period was 20 percent.[7] In fiscal 2004, state revenue collection
lagged so much that total state spending from state resources fell more than
$250 million from what had been spent the year before.[8]

The Michigan Senate Fiscal Agency estimates that implementing
the SOS proposal’s state spending cap in fiscal 1995 would have produced a
fiscal 2007 state spending limit of $27,674,900,000. The actual spending level appropriated for fiscal
2007 is $27,743,200,000.

Hence, if the SOS proposal had been in effect, fiscal 2007
state spending from state resources would have been just one-quarter of
one-percent less than spending in fiscal 2007 is currently budgeted to be. At
the same time, with the upward spike in annual state spending from fiscal 1995
to fiscal 2001 prohibited by the SOS spending cap, state government would
ultimately have spent approximately $9.6 billion less in total from fiscal 1995
to fiscal 2007 under the SOS proposal. The proposal would have required this
$9.6 billion surplus to be divided between taxpayer refunds and deposits into
the budget stabilization fund.[9]

The Budget Stabilization Fund: 1995-2007

The budget stabilization fund had a balance of almost
$1.3 billion in fiscal 2000. The fund is effectively empty today, the money
having been spent from fiscal 2001 through 2003 when state tax collections were
no longer keeping up with the spending pace that had been established in the
late 1990s. As noted above, the actual total state spending from state resources
for fiscal 2001 was more than $2.2 billion higher than it would have been if the
SOS cap had been placed on state spending in fiscal 1995.[10]

Assuming the fiscal 1995 enactment date for the SOS proposal
hypothesized by the Michigan Senate Fiscal Agency, and assuming that all
historical economic and tax collection facts remained constant, the SOS
proposal’s spending limits from fiscal 1995 through fiscal 2000 would have led
to almost $4.3 billion less state spending from state resources.[11]
The rules of the SOS proposal would have required that portions of this surplus
be deposited annually into the budget stabilization fund until the fund level
reached 10 percent of the annual state spending limit. The maximum 10 percent
balance would have been achieved by at least 1999 with a total of just over
$2.2 billion; the fund’s balance then would have grown with inflation and
population each year to mirror the growth of the SOS spending limit. By fiscal
2001, under a hypothetical SOS proposal, the budget stabilization fund would
have contained about $2.3 billion — more than $1 billion higher than the fund’s
actual balance.[12]††

This trend of producing a slow increase in the fund’s balance
would have continued in every year to the present except for fiscal 2005, the
only year when the tax money collected would have failed to equal the spending
limit. In fiscal 2005, state revenues from state resources would have dipped
below the allowable spending limit by $31.2 million, about one-tenth of
one percent less than that year’s hypothetical SOS cap. The state treasurer
would have made an automatic withdrawal to supplement spending. After this
withdrawal, the budget stabilization fund would have contained almost
$2.5 billion.[13] Thus, if all other factors had remained constant, and
if the SOS proposal had been implemented in fiscal 1995, it appears that after
2001, state government would have had a larger budget stabilization fund and
experienced diminished surpluses, rather than larger deficits.

†† There are several assumptions that make this a conservative estimate of the outcome. The budget stabilization fund balance was calculated only as direct deposits based upon the surplus figures reported by the Michigan Senate Fiscal Agency. Obviously, the fund is invested and earns interest, but these gains — while likely significant — were not calculated into the size of the hypothetical fund balance following fiscal 1995. Adding these monies would have led to a budget stabilization fund that achieved its maximum amount much sooner and required
smaller annual deposits to maintain the fund balance year to year. As such, the portion of the surplus dedicated to taxpayer refunds would have likely been larger.